1 txa nos.51 & 57 of 2012

IN THE HIGH COURT OF BOMBAY AT GOA

TAX APPEALS NO.51 & 57 OF 2012

TAX APPEAL NO.51 OF 2012

Mr. Mohd. Farhan A. ShaikhSatellite Complex, GFB No.1Koppikar Road,Hubli – 580 020. …. Appellant

VERSUS

The Deputy Commissioner ofIncome Tax, Central Circle 1Belgaum. …. Respondent

ANDTAX APPEAL NO.57 OF 2012

Mr. Mohd. Farhan A. ShaikhGFB No.1, Satellite Complex,Koppikar Road,Hubli – 580 020. …. Appellant

VERSUS

The Assistant Commissioner ofIncome Tax, Central Circle 1Belgaum. …. Respondent

Shri S.R. Rivankar, Senior Advocate with Shri Rama Rivankar, Advocatefor the Appellant.Ms. Amira Abdul Razaq, Standing Counsel for the Respondent.

Coram :- DAMA SESHADRI NAIDU, BHARATI DANGRE, SMT. M.S. JAWALKAR, JJJ.

Reserved on: 4 FEBRUARY 2021Pronounced on: 11 MARCH 2021

ORDER : (Per DAMA SESHADRI NAIDU, J.) Introduction:

A learned Division Bench of this Court at Goa has faced a

precedential cleavage on an issue. That issue is, does an income tax

authority’s “mere failure to tick mark the applicable grounds” in the notice

2 txa nos.51 & 57 of 2012

issued under Section 271 of the Income Tax Act, 1961 (“IT Act”) vitiate

the entire penalty proceedings?

2. These decisions, according to the Division Bench, have answered

that question in the affirmative—the failure vitiates the notice: (1) The

Commissioner of Income-Tax-11 v. Shri Samson Perinchery[1]; (2) The Prin-

cipal Commissioner of Income-Tax (Central) Bengaluru v. Goa Coastal Resorts

and Recreation Pvt. Ltd.[2]; (3) The Principal Commissioner of Income-Tax,

Panaji v. New Era Sova Mind[3] (TXA Nos.70/2019 & Ors, dated

18.6.2019); and (4) The Principal Commissioner of Income-Tax, Panaji v. Goa

Dourado Promotions Pvt. Ltd.[4].

3. On the other hand, an earlier decision by another co-equal bench,

according to the referring Division Bench, has taken a contrary view:

Commissioner of Income-Tax v. Smt. Kaushalya[5].

4. In the end, the Division Bench has found a direct conflict between

Goa Dourado Promotions and Kaushalya. So, through an order dated 28

February 2020, it has placed the matter before the Hon’ble the Chief

Justice under Chapter 1, Rule 8 of the Bombay High Court Appellate Side

Rules, 1960.

5. While placing the matter before the Hon’ble the Chief Justice for

issue-resolution by a larger Bench, the learned Division Bench has framed

this question for reference:

“[In] the assessment order or the order made under Sections 143(3)

and 153C of the IT Act, [when] the Assessing Officer has clearly

recorded satisfaction for the imposition of penalty on one or the

other, or both grounds mentioned in Section 271(l)(c), [would] a

mere defect in the notice of not striking out the relevant words

[…] vitiate the penalty proceedings?

1 ] TXA No.1154/2014 & Ors. dtd. 05.01.20172 ] TXA No.24/2019 dtd. 11.11.20193 ] TXA Nos.70/2019 & Ors. dtd. 18.06.20194 ] TXA No.18/2019 dtd. 26.11.20195 ] 216 ITR 660 (Bombay)

3 txa nos.51 & 57 of 2012

6. Besides, the Division Bench has also desired the larger Bench to

consider two more aspects: (a) “the impact of non-discussion on the aspect

of ‘prejudice’ in the [first set of decisions]”; (b) and “the effect of the

decision of the Hon’ble Supreme Court in case of Dilip N. Shroff v. Joint

Commissioner of Income-Tax[6] on the issue of non-application of mind

where the relevant portions of the printed notices are not struck off ”.

7. This is how the Hon’ble the Chief Justice constituted this Full

Bench for resolving the precedential tangle if any.

The Background:

8. Only to contextualise the issue, let us take the facts of one case

under reference: Tax Appeal No.51 of 2012. In July 2006, there was

search and seizure under section 132 of the IT Act in a company’s

premises at Belgaum and at Goa. The appellant was one of the main

transporters of that company. So the appellant’s case stood covered under

section 153C of the IT Act. To be explicit, section 153C provides that

where the search is conducted on a person and undisclosed

assets/documents indicating undisclosed income are found as belonging to

or pertains to “other person” other than “searched person”, then in that

case, proceedings under section 153C would be initiated against the “other

person”.

9. The appellant, on his part, initially filed a return of income in

November 2008, declaring a total income of Rs.39,67,790. But because of

the search and seizure proceedings against the company, the appellant was

put on notice under section 153A/153C of the IT Act. Then, the

appellant filed another return declaring the same taxable income as

returned in his original return of income. This return was revised to

include Rs.50,00,000/- on account of the declaration given during the

search, which was earlier erroneously offered to tax for AY 2007-08.

Subsequently, “on advise by the AO the same was offered to tax by

6 ] (2007) 291 ITR 519 (SC)

4 txa nos.51 & 57 of 2012

revising the return for AY 2006-07”. On 22/12/2008, the AO passed an

order under section 143, read with section 153C, of the IT Act.

10. As a result, the amount of Rs.50 lakhs was treated as

undisclosed income, and penalty proceedings under section 271(1)(c) were

initiated. In response to the show-cause notice issued, the appellant

contended that FY 2005-06 was the second year of his business. As he

was inexperienced, he was unaware of the accounting and taxation

formalities. Besides that, he has taken various other pleas. But,

unimpressed by the reply, the AO imposed the penalty. On appeal, the Id.

CIT(A) deleted the penalty. On further appeal, the Income Tax Appellate

Tribunal has restored the AO’s order of penalty. Aggrieved, the

appellant-assessee has filed the Tax Appeal No.51 of 2012. The other Tax

Appeal No.57 of 2012, too, has reached this Court with the same factual

backdrop.

The Appellants:

11. After taking us through the record and what seem to be

conflicting judgments, Shri Rivankar, the learned Senior Counsel for the

appellants, has submitted that Kaushalya is the only decision from this

Court that has taken a contrary view. All other decisions, according to

him, have taken a consistent view that a vague notice under section 274

r/w 271(1)(c) of the IT Act, in a printed form without a tick mark to the

relevant ground, would vitiate the penalty proceedings. The learned

Senior Counsel has also contended that Kaushalya has overlooked the two

ingredients to be satisfied by AO before his issuing notice under section

274 r/w 271 (1)(c): (a) that the Assessee has concealed the particulars of

his income, or (b) Furnished inaccurate particulars of such income. Both

these ingredients, Shri Rivankar points out, are in contradistinction to

each other.

5 txa nos.51 & 57 of 2012

12. To support his contentions, Shri Rivankar has relied on CIT v.

Reliance Petro products P. Ltd.[7] and CIT v. Manjunatha Cotton and Ginning

Factory.[8].

13. Shri Rinvankar has also submitted that the penalty proceedings

are distinct from assessment proceedings; they are independent of each

other. In penalty proceedings, the assessee may lead fresh evidence to

prove that there was no concealment or that the particulars furnished

were accurate and true. In support of that contention, he has relied on

Manjunath Cotton.

14. On the facts, Shri Rivankar has pointed out that the notice

issued to the appellants by the AO contained both the ingredients. And

the notice, therefore, discloses non-application of mind. That is, the AO is

not sure or categoric about which of the two ingredients applies to the

case.

15. Again, drawing our attention to Kaushalya, Shri Rivankar has

submitted that the Division Bench has erred in holding that the assessee

in Kaushalya suffered no prejudice. The assessee may have known the

charge against him from the assessment proceedings. But, that said, the

assessment proceedings and penalty proceedings are two different and

independent proceedings under section 143(3) and 271(1) of the IT Act.

They are, further, based on different documents or evidence.

16. In sum, the learned Senior Counsel argues that a composite

notice would create confusion in the assessee’s mind and disables him from

defending his case effectively. Thus, it results in the denial of a right to

adequate opportunity and fair hearing under section 274. In law, it is not

permissible to presume, according to Shri Rivankar, that the assessee

knows the charge, more so when proceedings are punitive. The learned

Senior Counsel stresses that penal laws must be construed strictly,

according to the language used in the statute. Section 274 clearly

mandates that the assessee must have a reasonable opportunity of hearing

7 ] (2010) 322 ITR 158 (SC)8 ] 359 ITR 565 (Kant)

6 txa nos.51 & 57 of 2012

before the authority’s passing an order imposing penalty. In other words,

the notice cannot be treated as a mere formality; it, in fact, requires strict

compliance.

17. In his arguments, Shri Rivankar has relied on these decisions: (1)

Ashok Pai v. CIT[9]; (2) CCIT v. Manjunath Cotton[10]; (3) Muninga Reddy

v. ACIT[11]; (4) CIT v. SSA Emerald Meadows[12]; (5) PCIT v. Smt.

Baisetty[13]; (6) CIT v. Samson Pericherry[14]; (7) PCIT v. Goa Coastal

Resorts[15]; (8) PCIT v. Goa Dorado[16]; (9) PCIT v. New Era Sova

Mine[17]; (10) NN Subramanium Iyer v. UOl[18]; (11) Kishori Mohan Bora v.

St. Of W.B.[19]; (12) UOI v. Dharmendra Textile[20]; (13) CIT v. Reliance

Petro Products[21]; (14) CIT v. Kaushalya[22].

Respondent:

18. Ms. Amira Razaq, the learned Standing Counsel for the

Revenue, submits that section 271 provides for imposition of penalty on

an assessee’s failure to furnish returns, comply with notices, conceal

income, and son on. And if the Assessing Officer or the Commissioner

(Appeals) or the Principal Commissioner, in any proceedings under the

Act, is satisfied that any person has concealed the particulars of his

income or furnished inaccurate particulars of such income, the penalty

can be levied.

19. Ms. Razaq’s specific submission is that the words "in the course

of any proceedings" would cover various proceedings, including search

9 ] (2007 292 ITR (SC) (Para 19)10 ] (2013) 359 ITR 565 (Kant) (para 34,59,60,63)11 ] (2017) 396 ITR 398 (Kant) (para 7-11)12 ] (2013) 386 ITR (ST) 1313 ] 2017 (0) SUPREME (AP) 274, para 7,8,10,15,1714 ] ITA/1154/2014 (Bom)15 ] TXA/24/2019 (Bom)16 ] TXA/18/2019 (Bom)17 ] TXA/70/2019 (Bom)18 ] (1974) 97 ITR 228(Ker) (Para 1,5,6)19 ] AIR 1972 SC 1749 (para 5-8, 10)20 ] (2008) 13 SCC 369 (SC), (para 15,16,20)21 ] (2010) 322 ITR 158 (SC) (para 9)22 ] (1994) 75 Taxman 549 (Bom), (p-2,4,5,6,7,8,10)

7 txa nos.51 & 57 of 2012

proceedings to unearth any incriminating material against the assessee.

Then, the authority can impose penalty if he is satisfied that the assessee

has concealed the particulars of his income or furnished inaccurate

particulars of such income. Section 274, according to Ms. Razaq, sets out

the procedure to be followed before the Revenue imposes that penalty. It

only contemplates the observance of the principle of natural justice.

20. The mandate of law, Ms. Razaq points out, is that no penalty

shall be imposed unless the assessee has been heard or has been given a

reasonable opportunity of being heard. She agrees that the principles of

natural justice stand ingrained in the section. According to her, the

penalty proceedings have their foundation in the assessment proceedings.

In other words, when the stage for imposition of penalty is reached, the

assessee already comes to know the charge against him: whether he is

being penalised for concealing the particulars of his income or for

furnishing inaccurate particulars of the income.

21. According to Ms. Razaq, the authority concerned applies his

mind when he passes the assessment order. So, the form in which the

notice is issued for imposing penalty looses its significance. As an example

of an ‘extreme case’, she would submit that if a notice is perfect but it

fails to disclose the mind of the assessing authority, the otherwise perfect

notice serves no purpose. In this context, Ms. Razaq submits that there is

no particular form prescribed for the notice to be issued under section 274

of the IT Act. Only by way of abundant caution, does the Revenue

circulate the format. And merely because a particular clause has not been

ticked off or struck out, it does not, and should not, result in any

prejudice, offending the principles of natural justice. Relying on a plethora

precedents, Ms. Razaq submits that unless prejudice or injustice is pointed

out, mere technical infraction of law would not vitiate an enquiry or any

order or result of any proceedings. And in judging the question of

prejudice, according to Ms. Razaq, the Court must act with a broad vision.

8 txa nos.51 & 57 of 2012

22. To support her contentions, after her painstaking presentation,

Ms. Razaq, too, has relied on a plethora of precedents. Among these

decisions, majority have been commonly relied on by both the parties, and

they have already been listed above. We will, now, refer to the other ones:

(1) Commissioner of Income-tax, Bangalore v. SSA’S Emerlad Meadows[23];

(2) State Bank of Patiala v. S.K. Sharma[24]; (3) Union of India v.

Dharamendra Textile Processors[25]; (4) Ventura Textiles Ltd. v. Commissioner

of Income Tax, Mumbai City-II[26]; (5) Gangotri Textiles Ltd. v. Deputy

Commissioner of Income Tax, Corporate Circle 2, Coimbatore[27]; (6)

Sundaram Finance Ltd. v. Assistant Commissioner of Income-Tax[28]; (7)

Sundaram Finance Ltd. v. Deputy Commissioner of Income-tax[29]; (8)

Commissioner of Income-tax-V v. Rampur Engg. Co. Ltd.[30]; (9)

Commissioner of Income-tax v. S.V. Angidi Chettiar[31]; (10) Commissioner of

Income-tax v. ECS Ltd.[32]; (11) K.P. Madhusudhanan v. Commissioner of

Income –Tax[33]; (12) State of U.P. v. Sudhir Kumar Singh.[34]

Discussion:

23. Indeed, Shri Rivankar, the learned Senior Counsel for the

appellants, and Ms. Amira Abdul Razaq, the learned Standing Counsel for

the Revenue, to their credit, have advanced very elaborate arguments,

most of which centre on the merits of the matter. But our remit here is

limited; we were asked to answer a reference. So, the individual or the

intrinsic merit of the appeals does not fall for our consideration. For that

reason, we will confine our discussion only to the precedential cleavage

the learned Division Bench has perceived between Kaushalya on the one

23] (2016) 73 taxmann.com 241 (Karnataka)24] (1996) 3 SCC 36425] (2008) 306 ITR 277 (SC)26] (2020)117 Taxmann.com 182 (Bombay)27] (2020) 212 taxmann.com 171 (Madras)28] (2018) 93 taxmann. Com 250 (Madras)29] (2018) 99 taxmann.com 152 (SC)30] (2009) 176 Taxman 211 (Delhi) (FB)31] (1962) 44 ITR 739 (SC)32] (2010)194 Taxman 311 (Delhi)33] (2001) 118 Taxman 324 (SC)34] 2020 SCC OnLine SC 847

9 txa nos.51 & 57 of 2012

hand and Goa Dourado Promotions, with its cohort of cases, on the other

hand.

24. We will summarise the issues the learned Division Bench has

referred to us:

1. If the assessment order clearly records satisfaction for imposing

penalty on one, or the other, or both grounds mentioned in Section 271(l)

(c), will a mere defect in the notice—not striking off the irrelevant matter

—vitiate the penalty proceedings?

2. Has Kausalya failed to discuss the aspect of ‘prejudice’?

3. What is the effect of the Supreme Court’s decision in Dilip N.

Shroff on non-application of mind when the irrelevant portions of the

printed notices are not struck off ?

25. Let us, first, appreciate which part of the statute governs the

issue before us. For our purpose, sections 271 and 274 of the Income Tax

Act, 1961, are material. To the extent relevant, section 271 reads:

271. Failure to furnish returns, comply with notices, concealment ofincome, etc.— (1) If the Assessing Officer or the Commissioner(Appeals) in the course of any proceedings under this Act, issatisfied that any person—(a) Omitted(b) has failed to comply with a notice under sub-section (1) ofsection 142 or sub-section (2) of section 143 or fails to comply witha direction issued under sub-section (2A) of section 142, or(c) has concealed the particulars of his income or furnishedinaccurate particulars of such income, he may direct that suchperson shall pay by way of penalty—(i) Omitted(ii) in the cases referred to in clause (b), in addition to any taxpayable by him, a sum which shall not be less than one thousandrupees but which may extend to twenty-five thousand rupees foreach such failure;(iii) in the cases referred to in clause (c), in addition to any taxpayable by him, a sum which shall not be less than but which shallnot exceed three times the amount of tax sought to be evaded byreason of the concealment of particulars of his income or thefurnishing of inaccurate particulars of such income.Explanation 1.— Where in respect of any facts material to thecomputation of the total income of any person under this Act,—(A) such person fails to offer an explanation or offers an explanationwhich is found by the Assessing Officer or the Commissioner(Appeals) to be false, or

10 txa nos.51 & 57 of 2012

(B) such person offers an explanation which he is not able tosubstantiate and fails to prove that such explanation is bona fideand that all the facts relating to the same and material to thecomputation of his total income have been disclosed by him, then,the amount added or disallowed in computing the total income ofsuch person as a result thereof shall, for the purposes of clause (c)of this subsection, be deemed to represent the income in respect ofwhich particulars have been concealed.”

26. Now, let us extract section 274, which prescribes the procedure

to be followed for an authority to impose a penalty under Chapter XXI. It

reads:

“274. Procedure.— (1) No order imposing a penalty under thisChapter shall be made unless the assessee has been heard or hasbeen given a reasonable opportunity of being heard.(2) No order imposing a penalty under this Chapter shall be made—(a) by the Income-tax Officer, where the penalty exceeds tenthousand rupees;(b) by the Assistant Commissioner or Deputy Commissioner, wherethe penalty exceeds twenty thousand rupees, except with the priorapproval of the Joint Commissioner.(3) An income-tax authority on making an order under this Chapterimposing a penalty, unless he is himself the Assessing Officer, shallforthwith send a copy of such order to the Assessing Officer.

27. We must admit that length and breadth of the arguments on

either side stand suffused with numerous precedents. So the issue-

resolution is essentially precedent-centric. Therefore, we cannot avoid

dwelling deep into the decisional dynamics of each case cited at the bar.

28. For the appellants, the flagship is Manjunatha Cotton, though it is

neither from the Supreme Court nor from this Court. It has persuasive

value, but one line of judgments from this Court has felt persuaded by

Manjunatha Cotton and, in fact, followed it. So, our discussion shall begin

with that.

Manjunatha:

29. In Manjunatha Cotton and Ginning Factory (“Manjunatha”), a

Division Bench of Karnataka High Court has dealt, in its own words, with

different facets of section 271 of the IT Act. If we take one tax appeal in

Manjunatha to set the stage for discussion, we notice that the assessee, a

11 txa nos.51 & 57 of 2012

partnership dealing in mining, processing, and exporting iron ore, filed its

return of income for the AY 2003-04. The Revenue processed the return

and completed the assessment under section 143(1) of the IT Act. Later, it

conducted a survey under section 133A of the Act and collected

information under section 133(6) of the Act.

30. Based on the information collected, the Revenue notified the

assessee under section 148 of the Act to reopen the assessment. It then

completed the assessment under section 143(3) read with section 147 of

the Act. Simultaneously, the Revenue initiated proceedings under section

274 read with section 271(1)(c) of the Act. When the assessee appealed

against the assessment order, it was partly successful. The assessee did not

challenge the appellate order further. Then, the assessing authority went

ahead with the penalty proceedings and imposed penalty. Aggrieved, the

assessee appealed but without success. Further aggrieved, it appealed to

the Tribunal.

31. The Tribunal perused the notice issued under section 274 of the

Act and noted that the assessing authority used a standard proforma.

Before issuing the notice, the AO neither struck off nor deleted the

“inappropriate words and paragraphs”. That is, the AO was not sure

whether she had “proceeded on the basis that the assessee has either

concealed its income or has furnished inaccurate details”. According to the

Tribunal, the notice did not comply with the statutory mandate and,

therefore, was vague. This vagueness betrayed the AO’s non-application

of mind. The other facets of the Tribunal’s reasoning do not concern us,

though. Aggrieved, the Revenue appealed to the High Court of

Karnataka.

32. The substantial question of law before the Karnataka High

Court is this: Was the notice issued under section 271(1)(c), read with

section 274, in the printed form was valid, though it did not specifically

mention whether the proceedings were initiated because of the assessee’s

concealing income or of furnishing inaccurate particulars?

12 txa nos.51 & 57 of 2012

33. Manjunatha exhaustively analyses the issue and holds that

section 271 of the IT Act is a specific provision providing for imposing

penalties. It is a complete code in itself, regulating the procedure for

imposing penalties prescribed. The proceedings have, therefore, to be

conducted under that provision, subject always to the rules of natural

justice. The provisions for the assessment and levy of tax, according to

Manjunath, will not apply to the penalty proceedings. That is, if there is a

specific provision, proceedings should be taken only under that provision.

So, the validity of penalty proceedings must be tested only from the

perspective of section 271.

34. Under the caption “procedure for imposing penalty”,

Manjunatha holds that once a penalty proceeding is validly initiated, then

under section 274(1), an obligation is cast on the person initiating the

proceedings to issue a notice to the assessee. That notice issued, it is open

to the assessee to contest the accusation that he has concealed income or

he has furnished inaccurate particulars. As there is an initial presumption

of concealment, it is for the assessee to rebut that presumption.

35. Then, under the caption “notice under section 274”, Manjunatha

acknowledges that the penalty proceedings can be initiated on various

grounds as set out under section 271. If the order passed by the authority

categorically mentions any grounds why the penalty proceedings must be

initiated, the notice under section 274 may conveniently refer to that order

which contains the authority’s satisfaction. But suppose the order of, say,

the assessment officer does not divulge those grounds. In that case, the

notice may get its justification from the deeming provision in Explanation

1 or in Explanation 1(B) of section 271.

36. In either event, the assessee must be notified of the grounds on

which the Revenue intends to impose a penalty. For section 274 clarifies

that the assessee has a right to contest the penalty proceedings and,

therefore, should have full opportunity to meet the Revenue’s case. The

13 txa nos.51 & 57 of 2012

assessee may show that the conditions stipulated in section 271(1)(c) do

not exist, and so he is not liable to pay the penalty.

37. Pertinently, Manjunatha refers to the Revenue’s practice of

sending a printed form where all the grounds mentioned in section 271

are mentioned. According to it, such an omnibus notice does not satisfy

the statutory requirement. It is more particularly so because the assessee

has the initial burden, and his failure to discharge that burden has serious

consequences: He may end up paying a penalty from 100% to 300% of the

tax liability. In other words, as section 271 needs to be strictly construed,

the notice under section 274 should satisfy the grounds which the assessee

has to meet specifically. Otherwise, the principles of natural justice are

offended on the grounds of vagueness. As a corollary, no penalty could be

imposed based on a defective or vague notice.

38. Manjunatha goes onto explain that Clause (c) of section 271

deals with two specific offences: concealing particulars of income or

furnishing inaccurate particulars of income. Indeed, some cases may

attract both the offences and some other cases may have an overlapping of

the two offences. Then, in such cases, too, the penalty proceedings must be

for both offences. “But drawing up penalty proceedings for one offence and

finding the assessee guilty of another offence or finding him guilty for

either the one or the other cannot be sustained in law”.

39. First, the satisfaction regarding the grounds mentioned in

section 271(1)(c) is essential for the Revenue to initiate the penalty

proceedings. Second, the penalty proceedings must be confined only to

those grounds specifically stated in the notice so that the assessee could

meet those grounds. It is not open to the authority, to impose a penalty on

the grounds other than what the assessee was called upon to meet.

40. Manjunatha relies on Ashok Pai and holds that concealing income

and furnishing inaccurate particulars of income carry different

connotations.

14 txa nos.51 & 57 of 2012

41. Finally, Manjunatha illustratively holds that when the Assessing

Officer proposes to invoke the first limb—that is, the concealment—then

the notice has to be appropriately marked. Similar is the case for the

second limb—that is, the inaccurate particulars of income. The standard

proforma without striking of the relevant clauses will lead to an inference

as to non-application of mind. Then, on the facts, Manjunatha has affirmed

the Tribunal’s finding that the entire proceedings were vitiated as the

notice issued was not under the law.

Kaushalya:

42. From among the judgments cited at the Bar, Kaushalya is this

Court’s earliest Division Bench decision, decided on 14 January 1992. One

of the substantial questions of law in Kaushalya was whether the Income-

tax Officer imposed penalties for the AYs 1968–69 and 1969–70 without

giving the assessee a reasonable opportunity of being heard.

43. Briefly stated, the Revenue opened the assessments for AYs

1967–68 and 1968–69 under section 147 of the IT Act. In response to the

notice under section 148, the assessee filed revised returns of income

disclosing income also from some other business for both AYs. The

Income-tax Officer reassessed the income and, by order under section

143(1), indicated that the penalty proceedings under section 271(1)(c)

would be initiated. The penalty imposed, the assessee appealed but could

not succeed. In a further appeal, the Tribunal ruled in the assessee’s

favour.

44. The Tribunal, in fact, held that the assessee had not been given a

reasonable opportunity of hearing because the show-cause notices were

ambiguous. The “material portion of the show-cause notice” informed the

assessee that he “concealed the particulars of [his] income or deliberately

furnished inaccurate particulars of such income”. The notice for the

second AY, too, contained the same allegation: “you have concealed the

particulars of your income or furnished inaccurate particulars of such

income.”

15 txa nos.51 & 57 of 2012

45. On the Revenue’s appeal, this Court has noted that the Tribunal

has focussed only on the use of the word “or” between the two groups of

words “concealed the particulars of your income” and “furnished

inaccurate particulars of such income”. This has led the Tribunal to

conclude that the penalties were founded upon ambiguous and vague

show-cause notices.

46. This Court in Kaushalya has found a difference between the

notice for AY 1967-68 and that for AY 1968-69. According to it, the

Tribunal was right in holding that the notice for AY 1967–68 was vague,

but it was wrong in holding so for the AY 1968– 69. Kaushalya has held

that the assessment order for AY 1968-69 already spelt out the grounds

for initiating the penalty proceedings. So the assessee fully knew the exact

charge of the Revenue against him for the AY 1968-69. In this

background, Kaushalya has faulted the Tribunal’s finding. According to it,

the notice for AY 1968-69 suffered neither from non-application of mind

nor from ambiguity. That is, the assessee suffered no prejudice. In this

context, Kaushalya has held that after all, section 274 or any other

provision in the Act or the Rules prescribed no particular form of notice.

47. Kaushalya has also emphasised that “the issuance of notice is an

administrative device for informing the assessee about the proposal to levy

penalty to enable him to explain as to why it should not be done". A mere

mistake in the language used or mere non-striking of the inaccurate

portion, it points out, cannot by itself invalidate the notice. "The entire

factual background would fall for consideration in the matter, and no one

aspect would be decisive".

48. That said, Kaushalya was pragmatic in its approach. It has,

indeed, acknowledged that “there can exist a case where vagueness and

ambiguity in the notice can demonstrate non-application of mind by the

authority and/or ultimate prejudice to the right of opportunity of

hearing contemplated under section 274”. To illustrate such an instance of

vagueness, Kaushalya has referred to the notice for the AY 1967-68.

16 txa nos.51 & 57 of 2012

49. In fact, the authorities issued the show-cause notice for the AY

1967-68 even before they completed the assessment. So, the assessee did

not know of the exact charge against him. In the notice, not only is there

the word "or" between the two groups of charges, but also there is the use

of the word "deliberately". The word "deliberately" did not exist in

section 271(1)(c) when the notice was issued. According to Kaushalya, the

notice clearly demonstrated non-application of mind.

New Era Sova Mine:

50. A Division Bench of this Court has affirmed the Tribunal’s

stand that the notice under section 274 was vague. According to New Era

Sova Mine, the Tribunal was correct in holding that “the penalty notices in

these cases were not issued for any specific charge, that is to say, for

concealment of particulars of income or furnishing of inaccurate

particulars”. In this context, it has relied on the Karnataka High Court’s

decision in CIT v. SSA's Emerald Meadows[35] to hold thus: “No notice

could be issued under Section 274, read with Section 271(1)(c), of the IT

Act without indicating which particular limb of Section 271(1)(c) was

invoked for initiating the penalty proceedings”.

Samson Perinchery:

51. In this case, on appeal, the Tribunal deleted the penalty imposed

upon the respondent-assessee. To do so, it has held that “the initiation of

penalty under Section 271 (1)(c) of the Act by Assessing Officer was for

furnishing inaccurate particulars of the income, while the order imposing

penalty was for concealment of income.” When taken in further appeal,

this Court has observed that while initiating penalty proceedings, the

Assessing Officer should be clear about which of the two limbs has been

contravened or indicate that both have been contravened. Samson

Perinchery has further approved the Tribunal’s view that the notice issued

under Section 274 of the Act should strike off irrelevant clauses. Lest the

35 ] ITA No. 380 of 2015, dated 23.11.2015, Karnataka High Court.

17 txa nos.51 & 57 of 2012

notice should betray non-application of mind on the Assessing Officer’s

part.

Goa Dourado Promotions:

52. In this appeal, one of the questions was whether the Tribunal

has erred in holding that the penalty proceeding fatally suffered for the

AO’s failure to tick the relevant box in the show cause notice.

53. A Division Bench of this Court has held that “the issues raised

in this Appeal are fully covered not only by order dated 11.11.2019 … but,

further, by the decision of this Court in the case of Commissioner of

Income Tax-11 v. Shri Samson Perinchery and Principal Commissioner of

Income Tax v. New Era Sova Mine”.

54. Thus, Goa Dourado Promotions has followed Samson Perinchery

and New Era Sova Mine. It has not, on its own, elaborated on the issue

before it but decided bound by the precedent.

Goa Dourado Promotions (Tribunal):

55. We have already noted that this Court’s judgment in Goa

Dourado Promotions is cryptic. If curiosity gets better of us, we may refer

to the Tribunal’s order, which came to this Court and which stood

affirmed.

56. As the record reveals, the Tribunal in its order, dt.03.01.2019,

has noted that in the assessment order, the AO has not specified whether

he was satisfied that the assessee has furnished inaccurate particulars of

income or is guilty of concealment of the particulars of income. In the

printed format of the notice under section 274, the relevant limb was not

specified.

57. On facts, the Tribunal has noted that the disallowance has been

sustained because necessary evidence was not produced. According to it,

this is not at all a case of concealing income or furnishing inaccurate

particulars of income. All the details, including the identity of the payee,

were there. Disallowance has solely been done as the assessee could not

produce evidence of expenditure for an advertisement. In this context, the

18 txa nos.51 & 57 of 2012

Tribunal has referred to Apex Court’s decision in Reliance Petroproducts

(P.) Ltd.: If the assessee’s claim is rejected, it does not automatically lead

to a levy of penalty u/s. 271(1)(c) of the IT Act.

Other Decisions the Appellants have Relied On:

Muninaga Reddy:

58. In Muninaga Reddy, a Division Bench of Karnataka High Court

has noted that the notice under section 274, read with section 271(1)(c),

was in printed form with no specific ground mentioned for imposing

penalty. So it has followed Manjunatha.

Bassett Revathi:

59. In Baisetty Revathi, a Division Bench of the High Court of

Telangana and Andhra Pradesh has found from the notice that “the

irrelevant contents therein, which had no application to the assessee, were

struck out, leaving only one clause”. That clause informs the assessee she

has “concealed the particulars of [her] income or furnished inaccurate

particulars of such income”.

60. But when the respondent-assessee submitted her explanation,

she did not object to any element of ambiguity in the notice. She

contested it on the merits. Only before the Tribunal, for the first time, did

she raise an objection. In that context, Baisetty Revathi has agreed that the

respondent has submitted her explanation on merits without raising a

doubt as to what was the precise allegation levelled against her. But,

according to Baisetty Revathi, what matters is the principle involved and

not just the isolated case of its application against the respondent.

According to it, the penalty order demonstrates that the Assessing Officer

was not even certain as to what was the finding on the strength of which

he imposed the penalty. This is clear from the Assessing Officer recording

that he was satisfied that the assessee had concealed/furnished inaccurate

particulars of income. So Baisetty Revathi has held that "in the absence of

a clear finding by the Assessing Officer himself, the benefit of the doubt

19 txa nos.51 & 57 of 2012

cannot be given to the revenue merely because the assessee did not

complain of vagueness in the show-cause notice earlier".

61. Then, Baisetty Revathi has echoed Manjunatha and held that

when penalty proceedings are sought to be initiated by the Revenue under

Section 271(1)(c) of the Act, the specific ground which forms the

foundation has to be spelt out in clear terms. Otherwise, an assessee would

not have a proper opportunity to put forth his defence. Baisetty Revathi has

specifically observed that when the charge is either concealment of

particulars of income or furnishing of inaccurate particulars of income,

the Revenue must specify which one of the two is sought to be pressed

into service. The revenue “cannot be permitted to club both by

interjecting an “or” between the two.

N. N. Subramania Iyer:

62. In N. N. Subramania Iyer, a learned Single Judge of Kerala High

Court has found the notice in a printed form, with all possible grounds

mentioned. It was under Wealth Tax, though. The notice has not struck

off any of those grounds, and there is no indication for what

contravention the petitioner was called upon to show cause why a penalty

should not be imposed. Even in the counter-affidavit filed by the second

respondent, he has not stated for what specific violation he issued it. So,

according to N. N. Subramania Iyer, “exhibit P-2 is a whimsical notice

issued to an assessee without intending anything”.

SSA’s Emerald Meadows:

63. The Karnataka High Court has held that no notice could be

issued under Section 274, read with Section 271(1)(c), of the IT Act,

without indicating which particular limb of Section 271(1)(c) was invoked

for initiating the penalty proceedings. It has, again, followed Manjuantha.

Taken in SLP, the Supreme Court dismissed the case at the admission

stage.

Kishori Mohan Bera:

20 txa nos.51 & 57 of 2012

64. In Kishori Mohan Bera, the District Magistrate, Hooghly, under

sub-section (1) read with sub-section (2) of section 3 of the Maintenance

of Internal Security Act, 1971, passed an order directing the petitioner's

detention. It was "with a view to preventing him from acting in a manner

prejudicial to the maintenance of the public order or security of the

State". Then, the petitioner was arrested on that very day and detained in

Hooghly Jail.

65. In the above factual backdrop, the Supreme Court finds that the

detaining authority was satisfied that it was necessary to detain the

petitioner to prevent him from acting in a manner prejudicial to "the

maintenance of public order or the security of the State." That

satisfaction "was on the disjunctive and not conjunctive grounds". It

means the District Magistrate was not certain whether he had reached his

subjective satisfaction about the necessity of exercising his power of

detention on the ground of danger to the public order or danger to the

security of the State.

66. In the above context, the Supreme Court has treated it as a well-

settled position that “an extraneous ground vitiates the order since it is

impossible to predicate whether without it the requisite satisfaction could

have been reached, the impugned order cannot be upheld”.

T. Ashok Pai:

67. In T. Ashok Pai, the Supreme Court has observed that an order

imposing penalty is quasi-criminal. So the burden lies on the Revenue to

establish that the assessee has concealed income. Since the burden of

proof in penalty proceedings varies from that in the assessment

proceeding, a finding in an assessment proceeding that a particular receipt

is an income cannot automatically be adopted in the penalty proceedings.

Though a finding in the assessment proceeding constitutes good evidence

in the penalty proceeding, it cannot, however, be conclusive. In the penalty

proceedings, the authorities must consider the matter afresh as the

21 txa nos.51 & 57 of 2012

question has to be considered from a different angle. According to it,

omitting the word “deliberately” may not be of much significance.

68. In the end, T. Ashok Pai has held that "Concealment of income"

and "furnishing of inaccurate particulars" carry different connotations.

Concealment refers to a deliberate act on the assessee' part. A mere

omission or negligence would not constitute a deliberate act of suppressio

veri or suggestio falsi.

Dilip N. Shroff:

69. In Dilip N. Shroff, the assessee faced the allegation of furnishing

inaccurate particulars. The valuation of property, as determined by a

registered valuer, as an expert, was disbelieved. The Revenue has

concluded that the assessee has furnished inaccurate particulars. Repelling

the Revenue’s stand, the Supreme Court has held that the assessee cannot

be held to have furnished inaccurate particulars merely because the

valuation report given by an expert is unacceptable for the Revenue.

70. In that process, the Supreme Court has traced the legal history

of section 271(1)(c) of the Act. Then, it has observed that because of such

concealment or furnishing of inaccurate particulars alone, the assessee

does not ipso facto become liable for a penalty. The imposition of penalty is

not automatic. Levy of penalty not only is discretionary, but such

discretion must be exercised by the Assessing Officer remembering the

relevant factors.

71. Primary burden of proof, according to Dilip N. Shroff, is on the

Revenue. The Assessing Officer must satisfy himself that there is primary

evidence to establish that the assessee had concealed the amount or

furnished inaccurate particulars. And this onus is to be discharged by the

Revenue. While considering whether the assessee has discharged his

burden, the Assessing Officer should not begin with the presumption that

he is guilty.

72. Once the Revenue discharges its primary burden of proof, the

secondary burden of proof, Dilip N. Shroff points out, would shift on to

22 txa nos.51 & 57 of 2012

the assessee. It is because “the proceeding under Section 271(1)(c) is of

penal nature in the sense that its consequences are intended to be an

effective deterrent which will put a stop to practices which the Parliament

considers to be against the public interest”. So, it was for the Revenue “to

establish that the assessee shall be guilty of the particulars of income”.

Dharmendra Textiles:

73. In Dharamendra, the apex court was dealing with the penalty

provisions in the Central Excise Act, 1944. The question was whether

section 11 AC, inserted by the Finance Act, 1996, should be read to

contain mens rea as an essential ingredient. And the next question was

about the levying of penalty below the prescribed minimum.

74. In fact, the matter was placed before a three-Judge Bench on a

reference. The reference was occasioned because of the decisional cleavage

perceived between Dilip N. Shroff and Chairman, SEBI v. Shriram Mutual

Fund[36]. During arguments, the assessee referred to Section 271(1)(c) of

the IT Act and took a stand that Section 11AC of the Act is identically

worded and, in a given case, it was open to the assessing officer not to

impose any penalty.

75. So, in that context, Dharmendra Textile has taken note of section

271(1)( c) and section 271C of the IT Act. While analysing these

provisions, Dharamendra Textile has observed that “the conceptual and

contextual difference between Section 271(1)(c) and Section 276C of the

IT Act was lost sight of in Dilip Shroff's case". According to it, the

Explanations appended to Section 272(1)(c) of the IT Act reveal an

element of strict liability on the assessee for concealment or for giving

inaccurate particulars while filing a return. The object behind section

271(1)(e), read with Explanations, indicates that that section has been

enacted as a remedy against the loss of Revenue. The penalty under that

provision is a civil liability. Wilful concealment is not an essential

ingredient for attracting civil liability, as is the case in the matter of

36 ] [(2006) 5 S.C.C. 361]

23 txa nos.51 & 57 of 2012

prosecution under Section 276-C of the IT Act. Dharamendra Textile, we

must note, hardly helps our discussion because its decisional sphere is

confined to section 11AC of the Central Excise Act. Its discussion on

section 272(1)(c) of the IT Act is incidental and, perhaps, illustrative—not

instructive. That is evident from what could be termed as clarification by a

two-Bench decision in Rajasthan Spinning and Weaving Mills.

Rajasthan Spinning and Weaving Mills:

76. The question, in this case, was about the conditions and the

circumstances that would attract penalty under Section 11AC of the

Central Excise Act. The Supreme Court, in its disposition, has held that

the reason assigned by the Tribunal to strike down the levy of penalty

against the assessees is as misconceived “as the interpretation of

Dharamendra Textile is misconstrued by the Revenue”.

77. In that process, Rajasthan Spinning and Weaving Mills has felt the

need to examine Dharamendra Textile. According to it, in almost every case

relating to penalty, the Revenue refers to Dharmendra Textile as if that case

laid down that in every case of non-payment or short payment of duty,

the penalty clause would automatically get attracted and that the

authority had no discretion in the matter. But Rajasthan Spinning and

Weaving Mills saw no reason to understand or read Dharamendra Textile in

that manner.

78. Finally, Rajasthan Spinning and Weaving Mills has held that

Dharamendra Textile must be understood to mean that “though the

application of section 11AC would depend upon the existence or

otherwise of the conditions expressly stated in that section, once the

section is applicable in a case, the concerned authority would have no

discretion in quantifying the amount”. And penalty must be imposed equal

to the duty determined under Sub-section (2) of Section 11A. That is

what Dharamendra Textile needs to be confined to.

Reliance Petro Products Pvt. Ltd.:

24 txa nos.51 & 57 of 2012

79. Here, the assessee furnished all the details of its expenditure as

well as income in its Return. The details, in themselves, were not found to

be inaccurate, nor did they conceal any income. The assessee, in fact,

claimed expenditure under certain heads, but the Revenue did not accept

that claim. In that context, the Supreme Court has held that “it was up to

the authorities to accept [the assessee’s] claim in the return”. According

to it, merely because the assessee had claimed the expenditure, which

claim was not accepted or was not acceptable to the Revenue, that itself

would not attract the penalty under Section 271(1)(c).

80. If the contention of the Revenue is accepted, further notes

Reliance Petro Products, then whenever a claim made in a return is not

accepted, the assessee will invite penalty under Section 271(1)(c). That is

clearly not the legislative intent. Thus, the mere making of the claim,

which is not sustainable in law, by itself, will not amount to furnishing

inaccurate particulars regarding the income of the assessee.

The Decisions the Revenue has Relied On:

81. To begin with, some of the decisions have been commonly relied

on by both the parties—the appellants and the Revenue. They have

already been discussed. Now, we will refer to the decisions the Revenue

has exclusively relied on.

S. K. Sharma:

82. The case is about disciplinary proceedings taken against a bank

officer. The employee's plea is about the employer violating the principles

of natural justice. The Supreme Court has referred to much case law on

the point and summarised the principles. It has stressed the principle of

prejudice. According to it, a substantive provision normally has to be

complied with, and the theory of substantial compliance or the test of

prejudice would not apply.

83. With violation of a procedural provision, the position, according

to S. K. Sharma, is this: procedural provisions are generally meant for

affording a reasonable and adequate opportunity to the delinquent officer.

25 txa nos.51 & 57 of 2012

They are, generally, conceived in his interest. Violation of any and every

procedural provision cannot be said to automatically vitiate the enquiry

held or order passed.

84. Except for cases falling under — "no notice", "no opportunity",

and "no hearing" categories, the complaint of violating procedural

provision should be examined from the viewpoint of prejudice—whether

it affected his chances to defend himself properly and effectively. In this

context, S. K. Sharma has pointed out that there may be certain procedural

provisions of a fundamental character, whose violation is by itself proof

of prejudice. The Court, then, may not insist on proof of prejudice in

such cases.

Ventura Textiles Ltd.:

85. Here, the appellant has contended that the notice under section

274 read with section 271 of the Act proposing to impose penalty was in a

printed format. But the inapplicable portion was not struck off. So,

whether a penalty was sought to be imposed on the assessee’s concealing

particulars of income or on its furnishing inaccurate particulars of

income was not indicated in the notice. This is contended to be a

fundamental error that goes to the root of the matter and has vitiated the

impugned order of penalty. Though this point has been raised for the first

time before the High Court, the appellant maintained that this being a

pure question of law touching upon the jurisdiction, it can be raised at

any stage.

86. A Division Bench of this Court has held that any court can

consider a question of jurisdiction even if it has not been raised before the

lower fora. According to it, the question relating to omitting the

inapplicable portion in a show-cause notice in printed format would go to

the root of the lis. So, it would be a jurisdictional issue.

87. Then, Ventura Textiles notes that though the Karnataka High

Court’s decision in SSA's Emerald Meadows was not interfered with by the

Supreme Court, the fact remains that dismissal of an SLP would not lead

26 txa nos.51 & 57 of 2012

to a merger of the High Court's order with the Supreme Court’s. In this

process, it also refers to Samson Pernchery, Goa Coastal Resorts & Recreation,

and New Era Sova Mine.

88. On facts, Ventura Textiles holds that in the assessment order,

dated 28.02.2006, the Assessing Officer ordered that since the assessee

had furnished inaccurate particulars of income, penalty proceedings under

Section 271(1)(c) were also initiated separately. Therefore, it was apparent

that penalty proceedings were initiated for furnishing inaccurate

particulars of income. It has further noted that the statutory show-cause

notice under Section 274 read with Section 271 of the Act proposing to

impose penalty was issued on the same day when the assessment order

was passed.

89. The notice, in printed form, contains at the bottom a direction to

the notice-issuing authority to ‘delete inappropriate words and

paragraphs.’ Yet, the Assessing Officer omitted to strike off the

inapplicable portion in the notice. Ventura Textiles has, indeed,

acknowledged that “such omission certainly reflects a mechanical

approach and non-application of mind on the part of the Assessing

Officer”.

90. Finally, Ventura Textiles poses unto itself a question: Has the

assessee had a notice about why a penalty was sought to be imposed on it?

91. In the factual context of the case, echoing Kaushalya, this Court

in Ventura Textiles has held that if the assessment order and the show

cause notice, both issued on the same date, are read in conjunction, what

emerges is this: The notice may be defective, but the assessee fully knew

the reason why the Assessing Officer sought to impose a penalty. The

purpose of a notice is to make the noticee, points out Ventura Textiles,

aware of the ground(s) of notice. So, it would be too technical and

pedantic for the Court to take the view that because in the printed notice

the inapplicable portion was not struck off, the order of penalty should be

set aside even though in the assessment order it was clearly mentioned

27 txa nos.51 & 57 of 2012

that penalty proceedings under Section 271(1)(c) of the Act had been

initiated separately for furnishing inaccurate particulars of income.

92. Of course, in the end, Ventura Textiles has held that the assessee

declared the full facts. It is, however, another matter that the claim based

on such facts was found to be inadmissible. This differs from furnishing

inaccurate particulars of income as contemplated under Section 271(1)(c)

of the Act.

Gangotri Textiles Ltd.:

93. One of the questions in Gangotri Textiles is whether the penalty

imposed under section 271(1)(c) of the Act sustains itself despite the

defective notice. The Madras High Court dismissed the assessee’s appeal.

Later, the assessee filed a review application. Then, much of the

discussion turns on what grounds must be available for the Court to

review its judgment. The High Court has, in fact, found none and

dismissed the review petition. We reckon this case helps neither party.

Sundaram Finance Ltd.:

94. In Sundaram Finance, the question is whether we can term a

notice under section 27(1)(c) of the Act valid if it does not show the

default, which the assessee must explain. The assessee has brought to the

Madras High Court’s notice the Karnataka High Court decision in

Manjunatha. But, in the end, Sundaram Finance has held that the existence

of the condition mentioned under section 27(1)(c) of the Act was writ

large on the face of the order of the Assessing Officer as well as the first

appellate authority. So it has refused to declare the notice invalid. Though

this case was taken in appeal, the Supreme Court dismissed the SLP in

limini.

D. M. Manasvi:

95. In D. M. Manasvi v. C.I.T., Gujarat[37], these are the substantial

questions of law: (1) Have the proceedings for imposing penalty been

properly commenced as required by section 271 of the IT Act? (2) Has

37] [1972] 86 ITR 557 (SC)

28 txa nos.51 & 57 of 2012

there been any material or evidence before the Tribunal to hold that the

assessee deliberately concealed particulars of his income or deliberately

furnished inaccurate particulars of such income as required by section

271(1)(c) of the Act?

96. The Supreme Court has noted that the authority concerned

issued a notice under section 274 after passing the assessment order. But

that would not, in the Court’s opinion, show that there was no satisfaction

of the Income Tax Officer during the assessment proceedings that the

assessee had concealed the particulars of his income or had furnished

incorrect particulars of such income. According to it, what is

contemplated by sub-section (1) of section 271 is that the Income-tax

Officer or the Appellate Assistant Commissioner should have been

satisfied regarding matters mentioned in the clauses of that sub-section. It

is, however, not essential that notice to the person proceeded against

should have been issued during the assessment proceedings. “Satisfaction

in the very nature of things precedes the issue of notice and it would not

be correct to equate the satisfaction of the Income Tax Officer or

Appellate Assistant Commissioner with the actual issue of notice”. Notice

is a consequence of that satisfaction; and it would be sufficient compliance

with the statute if the Income-tax Officer or the Appellate Assistant

Commissioner is satisfied with the matters referred to in clauses (a) to (c)

of sub-section (1) of section 271 during proceedings under the Income-

tax Act, even though notice to the person proceeded against in pursuance

of that satisfaction is issued subsequently.

97. That said, what clinches issue in D. M. Manasvi is the Supreme

Court’s observation that the appellant “has not produced or got printed in

the paper book the notice which was issued to him by the Income Tax

Officer in connection with the imposition of penalty”. Without that

notice, it cannot be said, as suggested by the assessee, that there was no

mention in the notice about the income tax officer’s satisfaction on the

29 txa nos.51 & 57 of 2012

point that the assessee had concealed the particulars of his income or had

furnished inaccurate particulars thereof.

S. V. Angidi Chettiar:

98. This is a case under the Income Tax Act, 1922, decided by a

Constitution Bench of the Supreme Court. In the course of assessment

proceedings, the Revenue imposed a penalty on the respondent-assessee.

Against that penalty order, one partner moved the Commissioner of

Income-tax, Madras, in revision but without success. Before the High

Court, the assessee succeeded. So the Revenue went to the Supreme Court.

99. S. V. Angidi Chettiar has held that old section 28, as it was

originally enacted, was somewhat obscure. The penalty which could be

imposed in cases referred to in clauses (b) and (c) was to be a sum not

exceeding one and a half times the tax, which would have been avoided if

the income as returned by such a person had been accepted as the correct

income. But the Legislature gave no indication whether the penalty was

related to the tax avoided by the partners of the firm or by the firm on the

footing that it was to be regarded as an unregistered firm.

100. Then, S. V. Angidi Chettiar quoted with approval the Calcutta

High Court judgment in Khushiram Murarilal v. Commissioner of Income-

tax, Central, Calcutta[38]. According to it, even when construed by its own

language, the concluding paragraph of S. 28(1) cannot be said to make it a

condition precedent that a person must be liable to pay some income-tax

or it may also be super-tax if he were to be made liable for a penalty.

Clause (b) of the proviso emphasises that the meaning of the concluding

paragraph of S. 28(1) assumes that under that provision, a person may be

chargeable to penalty although he may not be chargeable to tax.

101. Eventually, S. V. Angidi Chettiar has held that “the penalty under

section 28 would therefore in the event of the default contemplated by

clause (a), (b) or (c) be applicable in the course of assessment of a

registered firm”. If a registered firm is exposed to liability of paying the

38 ] 1954-25 ITR 572 (Cal)

30 txa nos.51 & 57 of 2012

penalty by committing any of the defaults contemplated by cl. (a), (b) or

(c) by virtue of section 44, notwithstanding the dissolution of the firm,

the assessment proceedings are liable to be continued against the

registered firm as if it has not been dissolved.

102. On facts, S. V. Angidi Chettiar has held that the High Court

erred in holding that penalty could not be imposed under Sec. 28 (1) (c) on

the firm after its dissolution.

Rampur Engg. Co. Ltd.:

103. In a batch of cases, the Income-tax Appellate Tribunal has

either deleted or affirmed the deletion of penalty levied upon the assessee

under section 271(1)(c) of the IT Act. It was on the grounds that the

authority initiating the penalty proceedings had not recorded its

satisfaction regarding concealment of income or furnishing of inaccurate

particulars by the assessee.

104. A Division Bench of the Delhi High Court has framed this

issue: Can the satisfaction of the officer initiating the proceedings under

section 271 of the Income-tax Act be said to have been recorded even in

cases where satisfaction is not recorded in specific terms but is otherwise

discernible from the order passed by the authority. Doubting another co-

equal Bench decision on the point, the latter Division Bench has referred

the matter to a Full Bench.

105. The Full Bench has followed the Supreme Court’s D.M.

Manasvi. According to it, it is not essential that notice to the person

proceeded against should have been issued during the assessment

proceedings. That is, it would be incorrect to equate the officer's

satisfaction with the actual issue of notice; the issue of notice is a

consequence of that satisfaction.

106. In the end, Rampur Engg. Co. has relied on the Supreme Court’s

S.V. Angidi Chettiar, and D.M. Manasvi. Then, it has held that the power to

impose a penalty under section 271 of the Act depends upon the officer's

satisfaction. It cannot be exercised if he is not satisfied and has not

31 txa nos.51 & 57 of 2012

recorded his satisfaction about the existence of the conditions specified in

clauses (a), (b) and (c) before the proceedings are concluded. It is true that

mere absence of the words "I am satisfied" may not be fatal, but such

satisfaction must be spelt out from the assessing authority's order as to

the concealing of income or furnishing of inaccurate particulars. Absent a

clear finding to that effect, the initiation of penalty proceedings will be

without jurisdiction. It has concluded that the first Division Bench's

decision needed no interference as it had laid down the correct proposition

of law.

Madhushree Gupta:

107. A Division Bench of Delhi High Court has considered the

position of law regarding section 271(1)(c) post-amendment by Finance

Act, 2008. According to it, the position of law, both pre- and post-

amendment, remained the same. It is because the Assessing Officer must

arrive at a prima facie satisfaction during the proceedings about the

assessee’s concealing the particulars of income or furnishing inaccurate

particulars before he initiates penalty proceedings.

108. According to Madhushree Gupta, a bare reading of section

271(1)(c) would show that to initiate penalty proceedings following pre-

requisites should be followed:

(i) The Assessing Officer should be ‘satisfied’ that: (a) The assesseehas either concealed particulars of his income; or (b) furnishedinaccurate particulars of his income; or (c) infracted both (a) and (b)above.

(ii) This ‘satisfaction’ should be arrived at during the course of ‘any’proceedings. These could be assessment, reassessment orrectification proceedings, but not penalty proceedings.

(iii) If ingredients contained in (i) and (ii) are present, a notice toshow cause under Section 274 of the Act shall issue setting outtherein the infraction the assessee is said to have committed.

109. Madhushree Gupta holds that the notice under section 274 of

the Act can be issued both during or after completing the assessment

32 txa nos.51 & 57 of 2012

proceedings. But the assessing officer’s satisfaction that section 271(1)(c)

has been infracted should be arrived at before the proceedings pending

before the assessing officer could conclude. So, the order imposing penalty

can be passed only after assessment proceedings are completed.

110. Relying on D. M. Manasvi and S.V. Angidi Chettiar, Madhushree

Gupta has summarised the legal proposition on the point of ‘satisfaction’.

That is, the ‘satisfaction’ which the assessing officer had to arrive at

during assessment proceedings for initiation of penalty proceedings was

‘prima facie’ in nature as against a ‘final conclusion’. Then, the notice under

Section 274 was to follow. What was important was that ‘satisfaction’ had

to be arrived at during assessment proceedings and not while issuing

notice under Section 274 of the Act. According to Madhushree Gupta, “due

compliance would be required to be made in respect of the provisions of

Section 274 and 275 of the Act”.

ECS Ltd.:

111. Here, the Delhi High Court was concerned with the validity of

the orders passed by the Income-tax Appellate Tribunal. One of the

questions before the Delhi High Court is about whether no satisfaction

has been recorded in the assessment order. If so, what is its effect?

112. To resolve the above issue, ECS Ltd. has held that section

271(1)(c) of the Act has been amended retrospectively with effect from 1

April 1989. Through that amendment, clause (IB) in Explanation to

section 271(1)(c) has been inserted. As per this clause, it is unnecessary for

the Assessing Officer to record his satisfaction while initiating penalty

proceedings. ECS Ltd. has noted that when the vires of this provision

were challenged, the Delhi High Court, through another judgment,

upheld the amendment. But, then, the Court felt that the provisions are to

be read down. According to it, even after the amendment, if the

satisfaction is not discernible from the assessment order, the penalty

cannot be imposed. The proceedings for initiation of penalty proceeding

33 txa nos.51 & 57 of 2012

cannot be set aside only because the assessment order states 'penalty

proceedings are initiated separately' if otherwise, they conform to the

statutory parameters.

113. Accordingly, ECS Ltd. has concluded that even when the

assessing officer has not recorded his satisfaction in explicit terms, the

assessment orders should indicate that the assessing officer had arrived at

such a satisfaction. Though the assessment order need not reflect every

item, such as addition or disallowance, "yet we have to find out that the

order is couched in such a manner", revealing the assessing officer's

opinion that the assessee had concealed the particulars of income or

furnished inaccurate particulars. In other words, this has to be discerned

from the reading of the assessment order.

114. On the facts, ECS Ltd. has found from the assessment order

that the assessing officer has been influenced by the consideration that not

only the assessee interpreted the law wrongly but also did not explain

expenditure attributable to such foreign income because of which penalty

proceedings under section 271(1)(c) were initiated by him. “Thus, his

prima facie satisfaction about non-furnishing of particulars/inaccurate

particulars is clearly discernible”.

K. P. Madhusudhanan:

115. One of the questions before the Supreme Court in K. P.

Madhusudhanan is whether the Tribunal was right in holding that penalty

cannot be levied if the assessing officer in the proposal under Section

271(1)(c) has not referred to Explanation 1(B) to Section 271(1)(c).

116. On this point, the Supreme Court has disapproved the findings

of this Court in CIT v. P.M. Shah[39] and CIT v. Dharamchand L. Shah[40].

Then, it has held that the Explanation to Section 271(1)(c) is a part of

Section 271. When the ITO or the Appellate Assistant Commissioner

39 ] (1993) 203 ITR 792 (Bom)40 ] (1993) 204 ITR 462 (Bom)

34 txa nos.51 & 57 of 2012

issues to an assessee a notice under section 271, he “makes the assessee

aware that the provisions thereof are to be used against him”. These

provisions include the Explanation. The assessee is, therefore, put to

notice that the assessee must prove, in the circumstances stated in the

Explanation, that his failure to return his correct income was not due to

fraud or negligence. Otherwise, he is deemed to have concealed the

particulars of his income or furnished inaccurate particulars of the

income. Consequently, he is exposed to penalty proceedings. According to

K. P. Madhusudhanan, no express invocation of the Explanation to section

271 in the notice under Section 271 is necessary before the provisions of

the Explanation are applied.

Sudhir Kumar Singh:

117. This case concerns the cancellation of the tender. Entire

proceedings leading to the cancellation of the tender were said to have

been done behind the tenderer’s back. So, the Supreme Court has found

that the rule of audi alteram partem breached in its entirety, and prejudice

has been caused to the appellant.

118. In the above backdrop, a three-Judge Bench of the Supreme

Court has noted that natural justice is a flexible tool in the judiciary’s

hands to reach out in fit cases and remedy injustice. The breach of the

audi alteram partem rule cannot by itself, without more, lead to the

conclusion that prejudice is thereby caused.

119. Where procedural or substantive provisions of law embody the

principles of natural justice, their infraction per se does not lead to

invalidity of the orders passed. Here again, prejudice must be caused to

the litigant. But that criterion does not apply to cases with mandatory

provisions of law. And those mandatory provisions must have been

conceived not only in individual interest but also in the public interest. No

prejudice is caused to the person complaining of the breach of natural

justice, according to Sudhir Kumar Singh, where such person does not

dispute the case against him or it. This can happen from estoppel,

35 txa nos.51 & 57 of 2012

acquiescence, waiver, and by way of non-challenge or non-denial or

admission of facts, where the Court finds on facts that no real prejudice

can therefore be said to have been caused to the person complaining of the

breach of natural justice.

120. Sudhir Kumar Singh further elaborates on the issue and holds

that in cases where facts are stated to have been admitted or not disputed

—and only one conclusion is possible—the Court does not pass futile

orders of setting aside or remand when there is, in fact, no prejudice

caused. This conclusion must be drawn by the Court on an appraisal of

the facts of a case and not by the authority which denies natural justice to

a person. The "prejudice" exception must be more than a mere

apprehension or even a reasonable suspicion of a litigant. It should exist

as a matter of fact or be based upon a definite inference of the likelihood

of prejudice flowing from the non-observance of natural justice.

What Applies?

121. In this maze of case law, we may get easily lost. To avoid that,

we will examine what actually is a precedent and what binds as a decision

for us to determine which decision conflicts with which.

Precedent:

122. It is one thing to say that a precedent should be followed; it is

another to say what it means to follow a precedent. And what is a

precedent, anyway? Before we answer that question, we need to accept

that before a court applies the doctrine of stare decisis to a given case, it

must first determine what that previous decision purports to establish.

More often than not, the ratio or holding of a case is difficult to gather; it

may even remain elusive. So, a precedent’s scope of applicability often

proves to be a matter of threshold importance.

123. Recently, a Division Bench of this Court in Gaur Pratibha v.

State of Maharashtra[41], to which one of us (Dama Seshadri Naidu, J.) was

41 ] (2019) 4 Bom CR 100

36 txa nos.51 & 57 of 2012

a party, has tried to unravel a few precedential tangles. We will, with

profit, refer to a few salient aspects of that decision.

What is the Precedent?

124. Salmond defines a precedent as a judicial decision, “which

contains in itself a principle. The underlying principle, which thus forms

its authoritative element, is often termed the ratio decidendi.” According to

him, it is “the abstract ratio decidendi which alone has the force of law as

regards the world at large." Professor John Chipman Gray, in his The

Nature and Sources of the Law[42] stresses that “it must be an opinion the

formation of which is necessary for the decision of a particular case; in

other words, it must not be obiter dictum."

125. Putting both the above views in perspective, Allen in his Law

in the Making[43], observes that “any judgment of any Court is

authoritative only as to that part of it, called the ratio decidendi, which is

considered to have been necessary to the decision of the actual issue

between the litigants. It is for the Court, of whatever degree, which is

called upon to consider the precedent, to determine what the true ratio

decidendi was."

126. Oft-quoted are the views of Holt C.J. and Lord Mansfield. In

Cage v. Acton[44], the former has held that "the reason of a resolution is

more to be considered than the resolution itself." Then, the latter has held

in Fisher v. Prince[45] that "the reason and spirit of cases make law; not

the letter of particular precedents." But in contrast is the now-widely-

accepted principle that the ratio decidendi of a case must not be sought in

the reasons on which the judge has based his decision.

127. Professor Morgan of the Harvard Law School[46] has given

these propositions: (a) The Court must have applied a rule of law; (b) Its

42] (2d ed. 1921) 26143 ] (2d ed. 1930) 15544 ] 12 Mod. 288, 294 (1796)45 ] 3 Burr. 1363, 1364 (1762)46] Morgan, The Study of Law, (1926) 109, as quoted by Prof. Goodhart.

37 txa nos.51 & 57 of 2012

application is a must for determining the issues presented; (c) Only that

rule of law as applied to the facts of the case is treated as the ratio.

128. If we consider the recent jurisprudential rumblings on the

never-ending debate of which part of judgment will have

precedential force, what comes to mind is the articulation advanced by

Garner et al. In a recent commentary on stare decisis—The Law of Judicial

Precedent[47]—the learned authors have elaborately treated this principle.

According to them, there can be no cavil about what binds of a decision as

a precedent. It is the holding.

129. And holding emerges when the ratio—the pure principle of

law—is applied to the facts of a case. That is, a holding is what the court

decides after combining the facts of a case with the legal principles those

facts attract. While holding might be thought to equate more nearly with

the court’s determination of the concrete problem before it, ratio decidendi

is normally seen, according to them, “as a genus-proposition of which the

concrete holding is one species or instance.” They do admit that the

distinction is a fine one for those who observe it. In the end, they declare

that ratio requires adherence to the extent possible, but the holding

compels compliance fully. Thus, stare decisis admits of no exception to a

'case holding in the adjudicatory hierarchy.

Why Precedent?

130. What is the justification for precedent? Why should a court be

required to follow earlier judicial decisions? No two cases are completely

alike, so if precedents are to constrain, they must not do so where there

are factual dissimilarities. According to Alexander, as quoted in Llyod's

Introduction to Jurisprudence, three models justifying precedential

constraint can be found in the literature.[48]

131. The “natural model” argues that past decisions naturally

generate reasons for deciding cases in the same way as previous ones.

Equality and reliance are commonly cited reasons. The second model is

47] Thomson Reuters, 2016, pp.44-4648 ] Llyod’s Introduction to Jurisprudence, Sweet & Maxwell, 9 ed., p.1561-62

38 txa nos.51 & 57 of 2012

the “rule model”. Under this model, the precedent court has authority "not

only to decide the case before it but also to promulgate a general rule

binding on courts of subordinate and equal rank". The third model is the

“result model”. According to this model, the result reached in the

precedent case, rather than any rule explicitly or simply endorsed by the

precedent court, is what binds.

Precedent:

132. Here, we have been buried under an avalanche of case-law.

Much of it is beside the point. That said, we cannot brush aside the

lawyers’ labour; at the same time, we ought to acknowledge the

complexity and the confusion of case law. Neil Duxury in his book The

Nature and Authority of Precedent[49], deals with the “the complexity of

case-law”. The learned author poses unto himself a question: Why has the

concept of the ratio decidendi left legal thinkers so confounded? There

seem to be six principal answers to this question[50].

133. First, the ratio decidendi and obiter dicta often blur into one

another. Obiter dicta, Cardozo remarked, 'are not always ticketed as such,

and one does not recognise them always at a glance'[51]. Much the same

could be said about the ratio decidendi[52]. The second difficulty with the

ratio decidendi is that in some decisions, it will be impossible to locate, let

alone separate from obiter dicta. Illustratively, Duxbury cites Central

Asbestos Ltd. V. Dodd[53]. A Bench of Five Judges decided that case: two

concurred and two dissented. The fifth judge, however, joined the

dissenting judges in reasoning but approved the concurring judges’

conclusion. So it was by a majority of three to two. When Dodd was cited

as the precedent before the Court of Appeal in Harper v. NCB[54], it had

49] Cambridge University Press, UK, 200850] Ibid, p.6851] Benjamin N. Cardozo, The Nature of the Judicial Process, 1921 Ed., p.3052] Cambridge University Press, UK, 2008, p.6953 ] [1973] AC 51854] [1974] QB 614

39 txa nos.51 & 57 of 2012

the unenviable task of discerning the majority opinion or case holding in

Dodd.

134. According to Lord Denning,

“We cannot say that Lord Reid and Lord Morris of Borth-y-Gestwere correct: because we know that their reasoning on the law wasin conflict with the reasoning of the other three. We cannot saythat Lord Pearson was correct: because we know that the reasoningwhich he accepted on the law led the other two (Lord Simon ofGlaisdale and Lord Salmon) to a wrong [that is, dissenting]conclusion. So we cannot say that any of the three in the majoritywas correct ... The result is that there is no discernible ratio amongthe majority of the House of Lords”[55].

135. The conclusion of the Court of Appeal in Harper v. N. C. B.

was that Central Asbestos Ltd v. Dodd yielded no discernible ratio decidendi

common to the majority of the House of Lords.

136. The third of the six answers as to why the concept of the ratio

decidendi has proved so perplexing is that “they yield multiple rationes

rather than no ratio. A decision based on only one judgment may contain

more than one ratio”[56]. Duxbury points out that “multiple rationes are

more usually discernible, nevertheless, in decisions composed of more

than one judgment, where an evenly composed court is equally divided, for

instance, or where a majority of judges reaches the same conclusion but

for different reasons”[57].

137. The fourth way in which the concept of the ratio decidendi has

perplexed legal thinkers concerns its coming into being. Is the ratio of a

case ‘the court’s own version of the rule of the case’ or what the case ‘will

be made to stand for by another later court’? Nevertheless, there clearly

are instances where the matter of what constitutes the ratio of a case is

up for grabs and will not be settled until another court has addressed it.

(74) In this context, Duxbury makes an interesting proposition about

whose word amounts the precedent. Is it that of the judge that has

decided the case, or is it that of the judge who interpreted that judgment

55] Cambridge University Press, UK, 2008, p.7256] Ibid, p.7257] Ibid, p.73

40 txa nos.51 & 57 of 2012

in a later case? We may quote Jerome Frank[58], who said that for

precedential purposes, a case means only what a judge in a later case says

it means.

138. The question of whether the ratio is created through the

judge’s words or through interpreting the judge’s words perhaps need not

exercise us all that much. The only significant points to emerge from this

puzzle, according to Duxbury, seem to be that the ratio can be determined

as much by the interpreter as by the speaker and that when judges

excavate rationes from past decisions, they are likely to influence if not

determine how that precedent is conceived as an authority in the future.

Certainly, this retrospective determination of rationes gives room for

manoeuvre [59].

139. The final two difficulties posed by the concept of the ratio

decidendi go hand in hand. First, there is a definitional problem. So far, this

issue has been skirted because ‘ratio decidendi’ has been taken simply to

mean ‘reason for the decision’ or ‘reason for deciding’. But that is by no

means the only definition of the ratio decidendi, and that to rely on this

definition alone is to risk oversimplifying the concept. Second, there is the

problem of determining the ratio decidendi. By defining the ratio, we settle

on what to look for. But this still leaves unaddressed the task of settling

on a method by which to look[60].

140. In the same vein goes the observation of Geoffrey Marshall of

Oxford in Interpreting Precedents: A Comparative Study[61], that there is in

one sense no problem in defining the character of obiter dicta, since they

consist in all propositions of law contained in the decision that are not

part of the ratio. But that negative assertion masks several ways in which

judicial dicta may be related to the holding in a particular case. An opinion

as to a point of law may be: (1) relevant to the disposition of a case or to

58] Courts on Trial, p.27959] Ibid, p.7560] Ibid, p.7561] Edited by D. Neil MacCormick and Robert S. Summers, Routledge, USA, 1997.

41 txa nos.51 & 57 of 2012

any other important legal issue; (2) relevant to the disposition of the case

but unnecessary to the holding; (3) relevant to some collateral issue in the

case in question; and (4) relevant to the disposition of other important

issues that may arise in other cases.

141. Julian Stone, in his book Laying Down the Law, gives us a good

example: Donoghue v Stevenson [1932]. In that case, the House of Lords

held that the manufacturer of a bottle of ginger beer could be liable to the

consumer if, before the bottle was sealed, the ginger beer was

contaminated by the remains of a snail, and the consumer became ill as a

result of drinking it. According to the learned author, strict, and

somewhat absurd, view on facts is this: It becomes a precedent only if the

next case has these facts: (1) Women, (2) from Scotland, (3) in which harm

can only come from snails, (4) in ginger beer bottles, and (5) placed

negligently. But logic suggests that the principle should apply, at the least,

to all food and drink which is packaged so as to prevent inspection. Then,

let us see how we can extend the scope of the facts:

(a) Fact as to the agent of harm can be a dead snails, or any noxious

element; (b) fact as to vehicle of harm may be an opaque bottle of ginger

beer, or any container of commodities for human consumption; (c) fact as

to defendant’s Identity can be a manufacturer of goods or anyone dealing

with the object; (d) fact as to potential danger from vehicle of harm may

be object likely to become dangerous by negligence; (e) fact as to injury to

plaintiff may be physical personal injury, or nervous or physical personal

injury, or any injury; (f) fact as to plaintiff ’s identity may be a Scots widow,

or any human being, or any legal person; (g) fact as to plaintiff ’s relation

to vehicle of harm may be a purchaser from retailer, or the purchaser from

anyone, or any person related to such purchaser.

What Binds?

142. Then, we can adopt Arthur L. Goodhart’s assertion[62] that it

is not the rule of law "set forth" by the court, or the rule "enunciated",

62] Determining the Ratio Decidendi of a Case, Yale Law Journal, Dec., 1930

42 txa nos.51 & 57 of 2012

which necessarily constitutes the principle of the case. There may be no

rule of law set forth in the opinion, or the rule when stated may be too

wide or too narrow. Goodhart quotes from Oliphant’s A Return to Stare

Decisis (1927) that the predictable element in a case is “what courts have

done in response to the stimuli of the facts of the concrete cases before

them. Not the judges' opinions.”

143. A proposition of law may be false or suspect. But if it gets

ensconced in any case as its ratio, it remains precedentially protected.

Sometimes courts decide cases, but they avoid stating any general

principle of law. They qualify their judgments with the phrases like these:

“in the special circumstances of the case”, “on the facts,” and so on.

Sometimes, the principle of a case may have been correctly stated, but the

proposition may remain too wide, covering, in isolation, a wider swath

than warranted. Some other times, the principle of a case, again, may have

been correctly decided, but the proposition may remain too narrow,

covering, in isolation, a narrow strip of facts.

144. We will illustrate how a proposition may be narrow or wide. In

Hambrook v. Stokes Bros[63], the facts are these:

Fact I : A bystander saw a gruesome accident.

Fact II : She died of shock.

Result : The Court decided that a bystander can recover

for injury due to shock.

145. Narrow and Wide Propositions: In Hambrook, the bystander

was the mother of the child who met with the accident. If the court

stresses this fact, we have a narrow precedent; if it does not, we have a

broad principle.

146. Professor Goodhart’s opinion, expressed in 1935, still holds the

field. This short, illuminating article betas any weighty tome on the topic.

According to him, what the judge does and not what he says matters. The

ratio of a case is what the court has done in response to the stimuli of the

63 ] [1925] 1 K. B. 141

43 txa nos.51 & 57 of 2012

facts of a case before it. Not the judge's opinion, but which way he decides

cases. We, however, hasten to add that facts of a case alone do not

constitute a precedent, nor does a pure principle of law. Not even the case

outcome can be termed a precedent. It is a combination of both fact and

law. We find the ratio or holding of a case at the confluence of fact and

law.

147. In the end, Professor Goodhart observes that, first, facts are

not constant between the cases; they are relative. Second, the judge founds

his conclusions upon a group of facts selected by him as material from

among a larger mass of facts. Some of those facts might seem significant

to a layman, but which, to a legal mind, are irrelevant. This, a judge's task

in analysing a case, in fact, is not to state the facts and the conclusion, but

to state the material facts—material as seen by him—and conclude the

case based on them. It is, therefore, essential to know what the judge has

said about his choice of the facts, for what he does has a meaning for us

only when considered in relation to what he has said.

148. In other words, to ascertain the material facts on which the

judge has based his conclusion, we cannot go behind the opinion to show

that the facts appear to be different in the record. We are bound by the

judge's statement of the facts even though it is patent that he has

misstated them, for it is on the facts as he, perhaps incorrectly, has seen

them that he has based his judgment. In fact, it is not uncommon that

sometimes the court considers a fact but disregards it as immaterial, or it

may miss out on a fact as it was not called to its attention by counsel or

was for some other reason overlooked. So what matters is what has been

stated, not what could have been stated, not what has been in the record

but missed out on. Then, a precedent gets its binding force based on only

the facts stated. An issue raised not addressed or an issue that has

altogether gone sub silentio cannot support a precedent.

44 txa nos.51 & 57 of 2012

149. To sum up, we may note that if a fact, however material it is,

was not considered by the court, then the case is not a precedent in future

cases where a similar fact appears.

150. Let us take the celebrated case of Rylands v. Fletcher[64] to

demonstrate this point. In that case, the defendant employed an

independent contractor to make a reservoir on his land. Negligently, the

contractor did not fill up some disused mining shafts. So the water escaped

and flooded the plaintiff's mine. The defendant was held liable.

The facts of the case:

Fact I : D had a reservoir built on his land.

Fact II : The contractor who built it was negligent.Fact III : Water escaped and injured P.Result : D is liable to P

Material Facts as Seen by the Court:Facts I : D had a reservoir built on his land.Fact III : Water escaped and injured P.Result : D is liable to P.

151. After stating the facts, the judges ignored the fact of the

contractor's negligence; they based their conclusions on the fact that an

artificial reservoir had been constructed. The negligence of the contractor

was, therefore, impliedly held to be an immaterial fact. Thus, by omitting

Fact II, the court established the doctrine of "strict liability."

152. Now, we will consider a similar case with a different outcome.

In Nichols v. Marsland[65]. the material facts were similar to those in

Rylands v. Fletcher. But it had an additional fact: the water escaped owing to

a violent storm. Had the court found that this additional fact was not a

material one, then the rule in Rylands v. Fletcher would have applied. But as

it found that it was a material one, the court was able to conclude

differently.

64 ] L. R. 3 H. L. 330 (1868)65 ] 4 L. R. 10 Ex. 255 (1875)

45 txa nos.51 & 57 of 2012

153. Let us take multi-member Bench. All the judges agree on the

result but differ in stating the material facts. Then, how can we pick the

ratio?

Material Facts: A case, decided by three judges, involves facts A, B

and C. For the first judge, fact A is material; for the second judge, fact B is

material; for the third judge, fact C is material. All the judges return the

same verdict, though. The principle of the case is, therefore, that on the

material facts A, B and C, the defendant is liable. In future cases, anyone

fact will suffice.

154. In the alternative, the first judge finds facts A, B, and C as

material; the second judge finds only fact C as material; the third judge,

too, finds fact C alone as material. For future cases, only fact C is material.

155. Finally, let us turn to what is real and what is hypothetical in a

case. If a judge in his opinion suggests a hypothetical fact, and then states

what conclusion he would reach if that fact existed, he is not creating a

principle. The difficulty sometimes is that we are not sure whether the

judge is treating a fact as hypothetical or real. In a case, a judge says, "in

this case, as the facts are so and so, I reach conclusion X." Even though

the judge may be wrong on facts, but the case is a precedent for the facts

stated, though wrongly, in that case. It is so because there is no

assumption; on the contrary, a non-existing fact is taken as existing—

erroneously may be.

156. When a case presents two sets of facts, what should follow? A

judge may determine the first set of facts and then conclude on them. The

judge may not desire to determine the second set of facts. Any views he

may express on the undetermined second set are accordingly obiter dicta.

If, however, the judge does determine both sets, as he is free to do so, and

concludes on both, then the case creates two principles, and neither is an

obiter dictum. That said, if the first case lacks any material fact or contains

any additional ones not found in the second, then it is not a direct

precedent for the second case.

46 txa nos.51 & 57 of 2012

157. However, it is necessary for us to know what the judge has said

about his choice of the facts, because what he does has a meaning for us

only when we know what facts he has relied on. “A divorce of the

conclusion from the material facts on which that conclusion is based is

illogical and must lead to arbitrary and unsound results.” To cap it, we

will once again recall how Goodheart sums up a curious mind's quest

to ferret out the elusive ratio decidendi or holding: If an opinion gives the

facts, the first point to notice is that we cannot go behind the opinion to

show that the facts appear to be different in the record. We are bound by

the judge's statement of the facts even though it is patent he has misstated

them, for it is on the facts as he, perhaps incorrectly, has seen them that he

has based his judgment.

158. Professor Goodhart summarises the rules for finding the

principle of a case:

(1) The principle of a case is not found in the reasons given in the

opinion.

(2) The principle is not found in the rule of law set forth in the

opinion.

(3) The principle is not necessarily found by a consideration of all

the ascertainable facts of the case and the judge's decision.

(4) The principle of the case is found by taking account (a) of the

facts treated by the judge as material, and (b) his decision as based on

them.

(5) In finding the principle, it is also necessary to establish what

facts were held to be immaterial by the judge, because the principle may

depend as much on exclusion as it does on inclusion.

159. The rules for finding what facts are material and what facts are

immaterial as seen by the judge are these:

(1) All facts of person, time, .place, kind and amount are immaterial

unless stated to be material.

47 txa nos.51 & 57 of 2012

(2) If there is no opinion, or the opinion gives no facts, then all

other facts in the record must be treated as material.

(3) If there is an opinion, then the facts as stated in the opinion are

conclusive and cannot be contradicted from the record.

(4) If the opinion omits a fact which appears in the record, this may

be due either to (a) oversight, or (b) an implied finding that the fact is

immaterial. The second will be assumed to be the case in the absence of

other evidence.

(5) All facts which the judge specifically states are immaterial must

be considered immaterial.

(6) All facts which the judge impliedly treats as immaterial must be

considered immaterial.

(7) All facts which the judge specifically states to be material must

be considered material.

(8) If the opinion does not distinguish between material and

immaterial facts, then all the facts set forth must be considered material.

(9) If in a case there are several opinions which agree as to the

result but differ as to the material facts, then the principle of the case is

limited so as to fit the sum of all the facts held material by the various

judges.

(10) A conclusion based on a hypothetical fact is a dictum. By

hypothetical fact is meant any fact the existence of which has not been

determined or accepted by the judge.

Summary:160. From all the judgments we have quoted about the scope of

penalty proceedings under section 271 (1)(c), read with section 274, of the

IT Act, we gather the following:

(a) Penalty under section 271(1)(c) is a civil liability.

(b) Mens rea is not an essential element for imposing penalty for

breach of civil obligations or liabilities.

48 txa nos.51 & 57 of 2012

(c) Willful concealment is not an essential ingredient for attracting

civil liability.

(d) Existence of conditions stipulated in section 271(1)(c) is a sine qua

non for initiation of penalty proceedings under section 271.

(e) The existence of such conditions should be discernible from the

assessment order or the order of the appellate authority or the revisional

authority.

(f) Even if there is no specific finding regarding the existence of

the conditions mentioned in section 271(1)(c), at least the facts set out in

Explanation 1(A) and 1(B) it should be discernible from the said order

which would be a legal fiction constitute concealment because of deeming

provision.

(g) Even if these conditions do not exist in the assessment order

passed, at least, a direction to initiate proceedings under section 271(1)(c)

is a sine qua non for the Assessing Officer to initiate the proceedings

because of the deeming provision in sub-section (IB).

(h) The imposition of penalty is not automatic.

(i) The imposition of penalty even if the tax liability is admitted is

not automatic.

(j) Even if the assessee has not challenged the order of assessment

levying tax and has even paid tax, that by itself would not be sufficient for

the authorities either to initiate penalty proceedings or impose penalty.

(k) If the explanation offered, even though not substantiated by the

assessee, but is found bona fide and all facts relating to the same and

material to the computation of his total income have been disclosed by

him, no penalty could be imposed.

(l) The direction referred to in Explanation 1(B) to section 271 of

the Act should be clear and without any ambiguity.

(m) If the Assessing Officer has recorded no satisfaction or has

issued no direction to initiate penalty proceedings, in appeal, if the

49 txa nos.51 & 57 of 2012

appellate authority records satisfaction, then the penalty proceedings have

to be initiated by the appellate authority and not the assessing authority.

(n) Notice under section 274 of the Act should specifically state the

grounds mentioned in section 271(1)(c), i.e., whether it is for concealment of

income or for furnishing of incorrect particulars of income. [We must,

however, admit that it is a contested conclusion.]

(o) Sending printed form where all the grounds mentioned in section 271

are mentioned would not satisfy the requirement of law. [This, too, eludes

unanimity]

(p) The assessee should know the grounds which he has to meet specifically.

Otherwise, the principles of natural justice are offended. Based on such

proceedings, no penalty could be imposed to the assessee.

(q) Taking up of penalty proceedings on one limb and finding the assessee

guilty of another limb is bad in law.

(r) The penalty proceedings are distinct from the assessment proceedings.

(s) The findings recorded in the assessment proceedings in so far as

“concealment of income” and “furnishing of incorrect particulars” would

not operate as res judicata in the penalty proceedings. It is open to the

assessee to contest the said proceedings on the merits. (italics supplied

and elaboration omitted)

161. In fact, these have been admirably summarised by Manjunatha.

And we acknowledge our debt to the decision that has saved our labour.

162. As aptly pointed out by the referring Division Bench, before

this Court there are two sets of cases. One set of cases is led by Kaushalya,

a decision earliest in point of time. The other set does not have a lead

case; they all have been cryptic but stand persuaded by Manjunatha. For

that reason, we have discussed the Karnataka High Court’s decision in

detail. Nevertheless, the referring Division Bench has found on one

precedential plank these cases: (1) Shri Samson Perinchery; (2) Goa Coastal

Resorts and Recreation Pvt. Ltd.; (3) New Era Sova Mind; and (4) Goa

50 txa nos.51 & 57 of 2012

Dourado Promotions Pvt. Ltd. On the opposite plank is Kaushalya. All by co-

equal Benches, though.

163. We have already discussed what constitutes the ratio decidendi

or case holding and what it takes to be a precedent. Now, we will see what

makes a precedent conflict with another.

The Precedential Conflict:

164. To cut the discussion short, we will take aid of the latest

Supreme Court judgment on this point. In Mavilayi Service Co-operative

Bank Ltd. v. Commissioner of Income Tax[66] (“Mavilayi”), the question

concerns the deductions a primary agricultural credit society can claim

under section 80P(2)(a) (i) of the IT Act, after the introduction of section

80P(4) of that Act. Two Division Benches of Kerala High Court have

taken conflicting views—the latter decision being unaware of the former

one. Finally, that precedential conflict stood resolved through a Full Bench

decision in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of

Income Tax, Calicut[67]. This Full Bench decision was taken to Supreme

Court. That is how, on 12 January 2021, a three-Judge Bench of the

Supreme Court has decided Mavilayi.

165. Mavilayi has noted that the Full Bench of Kerala High Court

has reached its conclusion based on the Supreme Court’s judgment Citizen

Cooperative Society Ltd. v. Asst. CIT, Hyderabad[68]. Indeed, Mavilayi

acknowledges that the Kerala High Court’s Full Bench did follow Citizen

Cooperative. But it holds that in Citizen Cooperative Society Ltd., the counsel

for the assessee advanced no argument that “the assessing officer and

other authorities under the IT Act could not go behind the registration of

the co-operative society in order to discover as to whether it was

conducting business in accordance with its bye-laws”. That sets Citizen

Cooperative apart, according to Mavilayi.

66] 2021 SCC OnLine SC 1667 ] 2019 (2) KHC 28768 ] (2017) 9 SCC 364

51 txa nos.51 & 57 of 2012

166. In this context, Mavilayi holds that only the ratio decidendi of a

judgment binds as a precedent. To elaborate on this proposition, Mavilayi

refers to State of Orissa v. Sudhanshu Sekhar Misra[69], which holds that a

decision is only an authority for what it actually decides. What is of the

essence in a decision is its ratio and not every observation found therein,

nor what logically follows from the various observations made in it. Then,

it quotes Dalbir Singh v. State of Punjab[70]. Though it was from the

dissenting judgment, Mavilayi points out, it remained uncontradicted by

the majority:

[A]ccording to the well-settled theory of precedents every decisioncontains three basic ingredients:“(i) findings of material facts, direct and inferential. An inferentialfinding of facts is the inference which the Judge draws from thedirect or perceptible facts;(ii) statements of the principles of law applicable to the legalproblems disclosed by the facts; and(iii) judgment based on the combined effect of (i) and (ii) above.”For the purposes of the parties themselves and their privies,ingredient (iii) is the material element in the decision for itdetermines finally their rights and liabilities in relation to thesubject-matter of the action. It is the judgment that estops theparties from reopening the dispute. However, for the purpose of thedoctrine of precedents, ingredient (ii) is the vital element in thedecision. This indeed is the ratio decidendi[71].

167. Then, Mavilayi applied the above principle and held that the

ratio decidendi in Citizen Cooperative would not depend upon the conclusion

arrived at on facts in that case. For the case is an authority for what it

actually decides in law and not for what may seem to logically follow from

it.

Do Goa Dourado Promotions and Kaushalya conflict?

168. As we have seen Goa Dourado Promotions concludes the case

based on the reasoning given in Tax Appeal No.24/2019 (decided on

11.11.2019), Samson Perincherry, and New Era Sova Mine.

69 ] (1968) 2 SCR 15470 ] (1979) 3 SCR 105971 ] R.J. Walker & M.G. Walker: The English Legal System. Butterworths, 1972, 3rd

edn., pp. 123-24]

52 txa nos.51 & 57 of 2012

169. The Tax Appeal No.24/2019, decided on 11.11.2019, relates to

The Principal Commissioner of Income Tax (Central) v. Goa Coastal Resorts

and Recreation Pvt. Ltd. In that one, the learned Division Bench has held:

6. Besides, we note that the Division Bench of this Court inSamson(supra) as well as in New Era Sova Mine(supra) has held thatthe notice which is issued to the assessee must indicate whether theAssessing Officer is satisfied that the case of the assessee involvesconcealment of particulars of income or furnishing of inaccurateparticulars of income or both, with clarity. If the notice is issued inthe printed form, then the necessary portions which are notapplicable are required to be struck off, so as to indicate with claritythe nature of the satisfaction recorded. In both Samson Perincheryand New Era Sova Mine, the notices issued had not struck of theportion which were inapplicable. From this, the Division Benchconcluded that there was no proper record of satisfaction or properapplication of mind in a matter of initiation of penaltyproceedings.

7. In the present case, as well if the notice dated 30/09/16 (at page33) is perused, it is apparent that the relevant portions have notbeen struck off. This coupled with the fact adverted to in paragraph(5) of this order, leaves no ground for interference with theimpugned order. The impugned order are quite consistent by thelaw laid down in the case of Samson Perinchery and New Era SovaMine and therefore, warrant no interference.

170. Samson Perinchery, too, has held that the notice issued under

Section 274 of the Act should strike off irrelevant clauses. And New Era

Sova Mine has endorsed the Tribunal’s view that “the penalty notices in

these cases were not issued for any specific charge, that is to say, for

concealment of particulars of income or furnishing of inaccurate

particulars”. In fact, Samson Perincherry relies on Karnataka High Court’s

SSA's Emerald Meadows, which, as we have already seen, has followed

Manjunatha. So, in a sense, it is a conflict between Kaushalya and

Manjunatha if we take comity, rather than stare decisis, as the reckoning

factor.

171. That said, as Mavilayi found distinguishing features in Citizen

Cooperative; here, too, the fact situation as obtained in Kaushalya has been

seen in none of these decisions: Goa Dourado Promotions, Goa Coastal

53 txa nos.51 & 57 of 2012

Resorts and Recreation, Samson Perinchery, New Era Sova Mine—not even in

Manjunatha. Granted, in both sets of cases, the proposition is this: To an

assessee facing penalty proceedings, the Revenue must supply complete,

unambiguous information so that he may defend himself effectually. This

proposition has given rise to this question: Where should the assessee

gather the required information from?

172. Goa Dourado Promotions and other cases have held that the

information must be gathered from the notice under section 271(1)(c) read

with section 274 of the IT Act. No other source was in the Court's

contemplation. In Kaushalya, both the proposition and the question were

the same. But it has one extra input: the order in assessment proceedings.

So it has held that the notice alone is not the sole source of information;

the assessment proceedings, too, may shed light on the issue and inform

the assessee on the scope of penalty proceedings. Whether assessment

proceedings can be a source of information and whether it can

complement the notice have not been considered in Goa Dourado

Promotions and other cases.

173. We, however, accept that the Revenue, often, adopts a

pernicious practice of sending an omnibus, catch-all, printed notice. It

contains both relevant and irrelevant information. It assumes, perhaps

unjustifiably, that whoever pays tax is or must be well-versed in the

nuances of tax law. So it sends a notice without specifying what the

assessee, facing penalty proceedings, must meet. In justification of what it

omits to do, it will ask, rather expect, the assessee to look into previous

proceedings for justification of its action in the later proceedings, which

are, undeniably, independent. It forgets that a stitch in time saves nine. Its

one cross or tick mark clears the cloud, enables the assessee to mount an

effective defence, and, in the end, its diligence avoids a load of litigation.

Is not prejudice writ large on the face of the mechanical methods the

Revenue adopts in sending a statutory notice to the assessee under section

271 (1) (c) read with section 274 of the Act? Pragmatically speaking,

54 txa nos.51 & 57 of 2012

Kaushalya casts an extra burden on the assessee and assumes expertise on

his part. It wants the assessee to make up for the Revenue's lapses.

Ex Post and Ex Ante Approaches of Adjudication:

174. In ex-post adjudication, the Court looks back at a disaster or

other event after it has occurred and decides what to do about it or how to

remedy it. In an ex-ante adjudication, the Court looks forward, after an

event or incident, and asks what effects the decision about this case will

have in the future—on parties who are entering similar situations and

have not yet decided what to do, and whose choices may be influenced by

the consequences the law says will follow from them. The first perspective

also might be called static since it accepts the parties' positions as given

and fixed; the second perspective is dynamic since it assumes their

behaviour may change in response to what others do, including judges.

(for a detailed discussion, see Ward Farnsworth's Legal Analyst: A Toolkit

for Thinking about the Law)[72].

175. Kaushalya has adopted an ex-post approach to the issue

resolution; Goa Dourado Promotions, an ex-ante approach. Kaushalya saves

one single case from further litigation. It asks the assessee to look back

and gather answers from whatever source he may find, say, the assessment

order. On the other hand, Goa Dourado Promotions saves every other case

from litigation. It compels the Revenue to be clear and certain. To be more

specific, we may note that if we adopt Kaushalya’s approach to the issue, it

requires the assessee to look for the precise charge in the penalty

proceedings not only from the statutory note but from every other source

of information, such as the assessment proceedings. That said, first,

penalty proceedings may originate from the assessment proceedings, but

they are independent; they do not depend on the assessment proceeding

for their outcome. Assessment proceedings hardly influence the penalty

proceedings, for assessment does not automatically lead to a penalty.

72] The University of Chicago Press, Chicago, 2007

55 txa nos.51 & 57 of 2012

176. Second, not always do we find the assessment proceedings

revealing the grounds of penalty proceedings. Assessment order need not

contain a specific, explicit finding of whether the conditions mentioned in

section 271(1)(c) exist in the case. It is because Explanations 1(A) and

1(B), as the deeming provisions, create a legal fiction as to the grounds for

penalty proceedings. Indeed, the Apex Court in CIT v. Atul Mohan

Bindal[73], has explained the scope of section 271(1)(c) thus:

“[E]xplanation 1, appended to section 27(1) provides that if thatperson fails to offer an explanation or the explanation offered by suchperson is found to be false, or the explanation offered by him is notsubstantiated, and he fails to prove that such explanation is bona fideand that all the facts relating to the same and material to thecomputation of his total income have been disclosed by him, for thepurposes of section 271(1)(c), the amount added or disallowed incomputing the total income is deemed to represent the concealed income.”

177. That is, even if the assessment order does not contain a specific

finding that the assessee has concealed income or he is deemed to have

concealed income because of the existence of facts which are set out in

Explanation 1, if a mere direction to initiate penalty proceedings under

clause (c) of sub-section (1) is found in the said order, by legal fiction, it

shall be deemed to constitute satisfaction of the Assessing Officer for

initiation of penalty proceedings under the said clause (c). In other words,

the Assessing Officer’s satisfaction as to be spelt out in the assessment

order is only prima facie. Even if the assessment order gives no reason, a

mere direction for penalty proceedings triggers the legal fiction as

contained in the Explanation (1).

178. Therefore, in every instance, it is a question of inference

whether the assessment order contained any grounds for initiating the

penalty proceedings. Then, whenever the notice is vague or imprecise, the

assessee assails it as bad; the Revenue defends it by saying that the

assessment order contains the precise charge. Thus, it becomes a matter

of adjudication, opening litigious floodgates. The solution is a tick mark in

the printed notice the Revenue is used to serving on the assessees.

73 ] [2009] 317 ITR 1 (SC)

56 txa nos.51 & 57 of 2012

179. Besides, the prima facie opinion in the assessment order need

not always translate into actual penalty proceedings. These proceedings,

in fact, commence with the statutory notice under section 271(1)(c) read

with section 274. Again, whether this prima facie opinion is sufficient to

inform the assessee about the precise charge for the penalty is a matter of

inference and, thus, a matter of litigation and adjudication. The solution,

again, is a tick mark; it avoids litigation arising out of uncertainty.

180. One course of action before us is curing a defect in the notice

by referring to the assessment order, which may or may not contain

reasons for the penalty proceedings. The other course of action is the

prevention of defect in the notice—and that prevention takes just a tick

mark. Prudence demands prevention is better than cure.

Answers:

Question No.1: If the assessment order clearly records satisfaction

for imposing penalty on one or the other, or both grounds mentioned in

Section 271(l)(c), does a mere defect in the notice—not striking off the

irrelevant matter—vitiate the penalty proceedings?

181. It does. The primary burden lies on the Revenue. In the

assessment proceedings, it forms an opinion, prima facie or otherwise, to

launch penalty proceedings against the assessee. But that translates into

action only through the statutory notice under section 271(1)(c), read with

section 274 of IT Act. True, the assessment proceedings form the basis

for the penalty proceedings, but they are not composite proceedings to

draw strength from each other. Nor can each cure the other's defect. A

penalty proceeding is a corollary; nevertheless, it must stand on its own.

These proceedings culminate under a different statutory scheme that

remains distinct from the assessment proceedings. Therefore, the assessee

must be informed of the grounds of the penalty proceedings only

through statutory notice. An omnibus notice suffers from the vice of

vagueness.

57 txa nos.51 & 57 of 2012

182. More particularly, a penal provision, even with civil

consequences, must be construed strictly. And ambiguity, if any, must be

resolved in the affected assessee’s favour.

183. Therefore, we answer the first question to the effect that Goa

Dourado Promotions and other cases have adopted an approach more in

consonance with the statutory scheme. That means we must hold that

Kaushalya does not lay down the correct proposition of law.

Question No.2: Has Kaushalya failed to discuss the aspect of

'prejudice'?

184. Indeed, Kaushalya did discuss the aspect of prejudice. As we

have already noted, Kaushalya noted that the assessment orders already

contained the reasons why penalty should be initiated. So, the assessee,

stresses Kaushalya, “fully knew in detail the exact charge of the Revenue

against him”. For Kaushalya, the statutory notice suffered from neither

non-application of mind nor any prejudice. According to it, “the so-called

ambiguous wording in the notice [has not] impaired or prejudiced the

right of the assessee to a reasonable opportunity of being heard”. It went

onto observe that for sustaining the plea of natural justice on the ground

of absence of opportunity, “it has to be established that prejudice is caused

to the concerned person by the procedure followed”. Kaushalya closes the

discussion by observing that the notice issuing “is an administrative device

for informing the assessee about the proposal to levy penalty in order to

enable him to explain as to why it should not be done”.

185 No doubt, there can exist a case where vagueness and

ambiguity in the notice can demonstrate non-application of mind by the

authority and/or ultimate prejudice to the right of opportunity of

hearing contemplated under section 274. So asserts Kaushalya. In fact, for

one assessment year, it set aside the penalty proceedings on the grounds

of non-application of mind and prejudice.

186. That said, regarding the other assessment year, it reasons that

the assessment order, containing the reasons or justification, avoids

58 txa nos.51 & 57 of 2012

prejudice to the assessee. That is where, we reckon, the reasoning suffers.

Kaushalya’s insistence that the previous proceedings supply justification

and cure the defect in penalty proceedings has not met our acceptance.

Question No.3: What is the effect of the Supreme Court’s decision

in Dilip N. Shroff on the issue of non-application of mind when the

irrelevant portions of the printed notices are not struck off ?

187 In Dilip N. Shroff, for the Supreme Court, it is of "some

significance that in the standard Pro-forma used by the assessing officer in

issuing a notice despite the fact that the same postulates that inappropriate

words and paragraphs were to be deleted, but the same had not been

done". Then, Dilip N. Shroff, on facts, has felt that the assessing officer

himself was not sure whether he had proceeded on the basis that the

assessee had concealed his income or he had furnished inaccurate

particulars.

188. We may, in this context, respectfully observe that a

contravention of a mandatory condition or requirement for a

communication to be valid communication is fatal, with no further proof.

That said, even if the notice contains no caveat that the inapplicable

portion be deleted, it is in the interest of fairness and justice that the

notice must be precise. It should give no room for ambiguity. Therefore,

Dilip N. Shroff disapproves of the routine, ritualistic practice of issuing

omnibus show-cause notices. That practice certainly betrays non-

application of mind. And, therefore, the infraction of a mandatory

procedure leading to penal consequences assumes or implies prejudice.

189. In Sudhir Kumar Singh, the Supreme Court has encapsulated

the principles of prejudice. One of the principles is that "where

procedural and/or substantive provisions of law embody the principles of

natural justice, their infraction per se does not lead to invalidity of the

orders passed. Here again, prejudice must be caused to the litigant,

“except in the case of a mandatory provision of law which is conceived

not only in individual interest but also in the public interest".

59 txa nos.51 & 57 of 2012

190. Here, section 271(1)(c) is one such provision. With calamitous,

albeit commercial, consequences, the provision is mandatory and brooks

no trifling with or dilution. For a further precedential prop, we may refer

to Rajesh Kumar v. CIT[74], in which the Apex Court has quoted with

approval its earlier judgment in State of Orissa v. Dr. Binapani Dei[75].

According to it, when by reason of action on the part of a statutory

authority, civil or evil consequences ensue, principles of natural justice

must be followed. In such an event, although no express provision is laid

down on this behalf, compliance with principles of natural justice would

be implicit. If a statue contravenes the principles of natural justice, it may

also be held ultra vires Article 14 of the Constitution.

191. As a result, we hold that Dilip N. Shroff treats omnibus show-

cause notices as betraying non-application of mind and disapproves of the

practice, to be particular, of issuing notices in printed form without

deleting or striking off the inapplicable parts of that generic notice.

Conclusion:

We have, thus, answered the reference as required by us; so we

direct the Registry to place these two Tax Appeals before the Division

Bench concerned for further adjudication.

(Dama Seshadri Naidu, J.)

(Bharati H. Dangre, J.)

(Smt. M.S. Jawalkar, J.)NH

74] (2007) 2 SCC 18175] AIR 1967 SC 1269